Benefits of pensions vs lump sums

When faced with decisions about retirement, one of the most common ones is likely to be how you want to receive your super – whether you choose to receive it through regular pension payments, withdraw it as a lump sum, or like many people, maybe a combination of both.

 

There’s generally no right or wrong answer here – ultimately it depends on your personal circumstances, your retirement plans and what the best strategy is for you.

How the options compare

Let’s take a look at some of the features of both options – a retirement pension (or income stream) compared with a lump sum benefit.

From a tax perspective, all super (whether it’s paid a pension or a lump sum) is tax-free after you turn 60. If you’re under 60, tax is generally payable on the taxable component of your super.

Retirement pension

Leaving your money in the super system in a pension account has some advantages, such as:

  • Tax-free investment earnings (compared with investments outside of super that will generally attract tax on any earnings)
  • Flexibility to choose the amount you receive in pension payments each year (subject to a minimum percentage of your account balance, and a maximum percentage for transition to retirement pensions) and the frequency of payments
  • Reassurance of receiving a regular income, with the option to withdraw an extra lump sum if the need arises

There may also be some drawbacks to a pension account, such as your account being exposed to investment markets, and therefore positive and negative returns affecting your account balance. There’s also no guarantee that your account will last for your lifetime, as your pension payments will stop once your account balance reaches zero.

Lump sum

Withdrawing super as a lump sum might give you more freedom and flexibility to make larger purchases (such as property, renovations or travel) or paying off any outstanding mortgage or other debts. But there might also be more temptation to spend a large amount of money sitting in a bank account without restrictions, meaning you might risk running out of super earlier. It is also worth considering that once you withdraw your super, you may not be able to put it back into the super or pension system down the track if you change your mind.

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Getting the right advice is important

When you take the above choices and factors into account, together with the potential tax implications and possible effects on Age Pension or other government entitlements, it’s essential to get the right advice before finalising any decisions. As a Group Super member, there are different advice options available to you as part of your account features.

Find out more

Other useful resources

    Financial decisions at retirement

    Retirement can take on different meaning from person to person, and one of the biggest challenges is how to fund your retirement. This feature provides detailed information to help you plan for your future. (Source: ASIC MoneySmart)

    Account-based pension calculator

    Try this handy calculator to help you determine how long you expect your pension to last and ways to make it last longer using different options. (Source: ASIC MoneySmart)

    Income sources in retirement

    In retirement, your income will likely come from more than one source. Each will have its pros and cons, and this article can help you make the income choices that are best for you. (Source: ASIC MoneySmart)